Liberty. It’s a simple idea, but it’s also the linchpin of a complex system of values and practices: justice, prosperity, responsibility, toleration, cooperation, and peace. Many people believe that liberty is the core political value of modern civilization itself, the one that gives substance and form to all the other values of social life. They’re called libertarians.

Wednesday, October 24, 2012

How Tax Reform Became a Conservative Cause

For
decades liberals railed against the gradual evolution of the federal
income tax into a morass of special provisions benefitting individual
interests at the expense of the average taxpayer. Under that system, tax
rates became meaningless for some households and companies because what
they paid depended on how many special exemptions they could claim.
Today, some liberals in Congress are leading the charge against a
new rewrite of the tax code, even suggesting that tax reform is merely a
plot to cut the taxes of America's wealthiest. One of the leading
Democratic opponents of tax reform, New York Sen. Charles Schumer, has
even bizarrely claimed that the last bi-partisan tax reform effort, in
1986, was only possible because there was no budget deficit to contend
with back then (in fact there was a whopping one which nearly eclipsed
the entire 1986 reform effort). The more you listen to some of these
opponents rail against the very notion of reform, the more you have to
wonder if the truth isn't that they have come to love the complexity of
our tax code even more than big business does, because the system is now
as much a vehicle for social engineering as it is a way to raise
revenues.
Discontent with the growing complexity of our tax code stretches back
decades and was a favorite theme of Democrats. President Kennedy took
office in 1961 with an aim to eliminate or reduce many of the special
exemptions in the code. He appointed as assistant treasury secretary
Harvard law professor Stanley Surrey, whose academic work argued that
tax exemptions and incentives were far less effective as vehicles of
social policy than direct government expenditures. Surrey crafted a
series of reforms in the early 1960s aimed at getting the loopholes out
of the tax code, only to see Republicans and Democrats alike help bury
them.

In 1969, Lyndon Johnson's last Treasury Secretary, Joseph Barr,
created a sensation when he released a list of 155 people who earned
more than $200,000 annually but paid no income tax. But that merely
resulted in passage of the Alternative Minimum Tax, which capped the
number of deductions wealthy individuals can take. Jimmy Carter tried
again nearly a decade later for broader reform, only to see his tax
reform efforts disappear along with his political capital as his
presidency struggled. Ronald Reagan followed and hardly began as the
apostle of simplification. He even once referred to tax reform as a
"liberal myth."

But a young liberal senator of the time, Bill Bradley, believed that
simplifying the tax code could unlock economic activity and help restore
people's faith in the income tax at a time when it was rapidly waning. A
1985 poll, in fact, found for the first time that Americans thought
that the federal tax code was less fair than the state and local taxes
they paid.
Bradley hoped to tap into that dissatisfaction. He had one idea,
however, that liberals had not emphasized in pushing for reform. An
All-American college basketball player, Bradley got a big contract to
play for the New York Knicks and spent 10 years in pro basketball
earning a hefty salary. During that time, Bradley saw firsthand how high
tax rates distorted economic decisions. He told of being asked how he
wanted to be paid in the NBA to minimize taxation: in property, through
deferred retirement income, or into a corporation set up in his name.
Bradley even devoted passages in his biography to ways he and his
teammates tried to minimize their taxes. So Bradley came to believe that
a simpler tax code that lowered rates but provided fewer loopholes and
exemptions would not only be fairer, but less economically distorting.
Dollar Bill Bradley found common cause with a one-time professional
entertainer, Ronald Reagan, who had earned big paychecks as an actor and
so like Bradley understood the disincentives in the tax code. Still,
Reagan wondered at the wisdom of pursuing tax reform when the bigger
issue at the time was dealing with the deficit, which clocked in at $221
billion on a budget of $990 billion in 1986. Bradley, too, worried that
his tax reform legislation would become a mere ‘sideshow' to concerns
over the federal budget.
Still, gradually Reagan became convinced that the long-term effect of
lower tax rates would be worth the fight. Members of his administration
also came to see a historic simplification of the tax code as a
singular achievement. Don Regan, the Treasury Secretary from Wall
Street, started showing up to strategy sessions and announcing that it
was time to "do away with Santa Claus."
Supporters came to include significant Democrats, including the
powerful chair of the House Ways and Means Committee, Dan Rostenkowski,
who gave a remarkable televised address in which he pointed out that a
Republican president was advocating for something that Democrats like
Truman and Kennedy had supported, and it was time for Democrats to sign
on, too.
They eventually did, though it took several years and concessions on
both sides. Republicans, for instance, originally argued it wasn't worth
doing the reform unless they could get tax rates below 30 percent. They
settled for a nominal top rate of 28 percent that was actually 33
percent with surcharges added in. Similarly, Bradley wrote in 2009 that,
"the bill would never have passed had some Democrats not taken on an
ingrained party orthodoxy - the belief that equity demanded higher tax
rates."
The landscape has changed significantly since then. Most
conservatives (though certainly not most Republicans) have come to see
the range of incentives and exemptions in the tax code as wrongheaded,
including those for businesses which smack of little more than corporate
cronyism. This is in sharp contrast to 1986, when many Republicans in
Congress resisted reform until a popular GOP president came along
willing to take on the business community.
The leadership of the Democratic Party is different, too, led by
Schumer on tax issues. Unlike Bradley, who had spent more than a decade
watching the tax code work in a high-paying private sector job, Schumer
is entirely a creature of the public sector. The Congressional Democrat
leading his party on tax matters has never collected a private sector
paycheck of any substance, having run for state assembly the year he
exited law school at the age of 24 and held public office since.
Nominally, Schumer says he opposes tax reform because now is not the
time to reduce tax rates given the steep federal deficit, even though
some reform plans devote a portion of the savings from eliminating
deductions to closing the budget gap. But his real objection seems
embedded in an interview he recently did in which chided fellow
Democrats who used the terms ‘loopholes' and ‘tax expenditures'
interchangeably. Instead he defended some tax expenditures as "very
important and very good policy." Ironically, the term ‘tax expenditure'
was coined by a liberal Democrat, JFK's tax adviser Stanley Surrey, to
illustrate his contention that Congress was misusing the tax code for
social policy when other approaches to addressing those issues would
have been more effective.
Today, by contrast, it sounds like the most dangerous place in
Washington is becoming anyplace between Schumer and a tax expenditure.